Advisers delegate investment responsibility to multi-managers

Financial advisers looking to delegate asset allocation and other investment decisions to fund managers often direct their client’s investments into balanced funds. They may, however, also be relinquishing the potential for stronger returns via vehicles like multi-manager funds that provide similar or greater levels of protection against risk.

According to Ronnie Retief, Head of Multi-Management at Novare Investments: “IFAs have historically used single manager balanced funds in the hope that their skill in selecting asset classes would solve the adviser’s investment problems.

“While many balanced funds do a good job, there are several reasons why advisors should be careful of thinking that balanced funds are a cure-all for their clients’ investment needs.”

Mr Retief commented that no single investment manager can consistently be the best in all areas of the asset class spectrum.

Many excel within a particular asset class, but by their own admission do not cover all in the same detail. Balanced funds often turn to related in-house funds to fill the blanks, potentially introducing conflicts of interests and political dynamics.

“Abdicating responsibility to a balanced fund also means that the adviser loses control over one of the most important portfolio risk and return drivers, the asset class mix. The importance of controlling this within predefined parameters, dependent on the risk-return characteristics of the client’s profile, cannot be underestimated,” he said.

Achieving the required rate of return, while controlling risk - for which control of the asset class mix is necessary – is more difficult when an adviser delegates the decision to a balanced fund or a combination of balanced funds, which may allocate a disproportionate amount to the asset class they deem most appropriate for an extended period.

Mr Retief said that in terms of managing risk, forsaking control of the asset mix could be detrimental to appropriate client planning.

“IFAs internationally and locally are using multi-managers with dedicated and professional teams to help with manager selection and portfolio construction.”

Portfolio construction is important in putting together a robust portfolio that will serve the investor well through the investment cycle, and which is not beholden to a particular market phase and lacking in diversification - despite having several underlying asset managers.

However, combining different managers with different specialist asset class strategies may lead to an unintended concentration of exposure to a single risk factor, making it important to thoroughly understand the asset managers and what each brings to the portfolio.

“Multi-managers should provide a range of services including strategic asset allocation, manager selection, portfolio construction, tactical asset allocation and, importantly, risk management.

“They should have the independence to offer clients the best available solution without any interference from a parent company providing single manager solutions,” said Mr Retief.